Friday, May 04, 2007

Fake Estate

The provincial government is facing its first serious issue since Stelmach became Premier, and it's fun to watch them try, yet horribly mismanage the issue.

It seems the issue started with something small but positive the government did, announcing that they were lengthening the time between allowable rent hikes to one year, up from six months. I'll be honest, this is more relief than I expected from this government, and in fact, serves me very well indeed since my own rent went up a very small amount, very recently. I'm safe for a long time. But not everyone here in Edmonton, or anywhere in Alberta, is. We've all been reading the stories, possibly even know people, facing obscene rent increases, because landlords have come to the conclusion that the market can bear it right now.

Pull that thread, and we come to an overheated real estate market. Not that long ago, anyone who could pay a thousand dollars or more in rent every month could afford to buy a house and pay a mortgage. That was the outlet the free market used to keep rent costs within reason - there was always enough capacity in the rental market, because people who became increasingly successful and financially secure could leave it. Today, virtually no one gets to leave the rental market who isn't already invested in a house - it's one thing to go from $250K condo to $350K house, when you didn't buy the condo for 250K and perhaps only owe 100K of the 150 you paid a few years ago. Essentially, you're extending your debtload, but you also have a bunch of equity in the house, so the debt isn't so intimidating and the bank is happy to talk with you. But to buy that 250K condo to escape your increasing rent? That takes more than a single middle-class income, and it may take more than two.

What's a landlord to do? There are many more people moving into Edmonton, Calgary, Fort McMurray, Grande Prairie.... they all need places to live. If the market decides that a 500-square-foot concrete box is worth a thousand dollars a month, who are you as a landlord to argue? Even the friendliest, most generous landlord, though she might maintain the rent level with only moderate increases for current tenants, would be absolutely moronic not to price to the market for any new tenants. People get trapped in their current rental situations. The free market that the Tories believe will help everyone along doesn't serve people who aren't offered competitive choices.

Rental increase caps would still trap people in their current situations, because the government, any government right or left, is unlikely to cap the price a landlord can negotiate with a new tenant. Left or right, though, I think most people would agree that having only one option is better than having no options at all except to leave the province. Capping the increases mean that the one option you, the tenant, are living with now is the one you'll want to (or have to) stick with while the worst of the real estate boom washes over the province.

The government tells us that capping increases would stifle development of new rental construction. Well, this very minute represents the apex of potential rental profitability in Edmonton and Calgary. Where's the new construction? I see lots of houses and condos, but the only new rental units I see coming on the market are condos being bought by real estate speculators and rented out. Construction started on 593 rental units throughout all of 2006 in Alberta. What is that - two decent-sized towers in Ft. McMurray? Where is all this construction that the Tories are worried about stifling? Where are the market forces that are supposed to be producing new buildings for renters in Alberta's two largest cities?

Part of the problem goes back to our overheated real estate market. There are only so many tradespeople available to build in Alberta. They're overwhelmingly tasked with constructing condos and half-million-dollar houses, striking while the iron is extremely hot. What developer is going to give up people to build rental accommodation? Double the rent prices in Edmonton, and it might make economic sense to build, but who's going to do that work? There'd be nowhere those workers can afford to live.

The free market did a fine job of keeping rental prices reasonable when supply and demand were similar numbers. Demand is increasing, as workers move to Alberta cities and the economic bar to home ownership rises exponentially faster than wages. Supply doesn't change at all, no matter the economic theories of our Premier. If we price working class people out of both the ownership market and the rental market, they leave the province, and Alberta's good economic times come to a sudden halt. What's the solution?

A rental increase cap will defer this crisis. It's not a permanent solution, but it's probably a reasonable temporary solution until the real estate bubble bursts. And burst it will, at least in Edmonton and Calgary where real estate speculation, sometimes heavily leveraged, seems to be all the rage. Even if house prices never get any lower than they are today, any slowdown in the market or increase in the interest rate will make some speculators run to turn their properties into cash, and there, you'll see the invisible hand of the market at work, giving the most heavily-leveraged speculators a sound spanking. Defaults and abandonments of mortgages may follow, and that puts upward pressure on interest rates, which may lead to some domino effect - the less-leveraged all of a sudden find that they too are borrowed beyond their means to service their debt. As the speculators leave the market and housing comes available again to the people who want to live in it, some of the pressure on the rental market will ease.

But if we want a longer-term solution, one that will insure that the forces at play today don't come around again, then we need to legislate the building of rental property. As new communities spring up all over Edmonton, it's obvious that high-density housing is part of the community planning, because there are always condo complexes tucked in among the mini-palaces. Why can't development approval be dependant upon a certain amount of rental accommodation, too? It doesn't all have to be within the complexes, either - a duplex on every couple of streets legislatively forced onto the rental market would serve just as well.

Economic prosperity in this province depends on the working class. Turning the obvious rental crisis into a ideological battle is stupid beyond belief - a practical solution is required. Cap or no cap, there's no non-legislative incentive to increase supply. Any rental cap introduced would have to be seen as a short-term, stop-gap measure, and that's exactly what's needed right now - a short-term, stop-gap measure. In the medium term, the levers of government have to be used to increase supply to the rental market, particularly now, while building is at its craziest and that lever will have its greatest positive impact. Without these steps, we're gutting our own prosperity.